Is The Trade Desk Stock a Good Long-Term Investment?

Shares of advertising tech company The Trade Desk (TTD 1.67%) gave investors a roller-coaster ride over the past year. Macroeconomic conditions, such as rising inflation, contributed to the stock hitting a 52-week low of $39 last July.

The stock then zoomed past $70 per share last August, only to drop below $40 in November. But as the inflation rate cooled in 2023, The Trade Desk's stock price came roaring back, reaching a 52-week high of $79.38 as recently as June 28.

Is this year's run-up simply investor exuberance over what some call a bull market? Or does The Trade Desk possess qualities that make it a good investment over time despite the roller coaster of the past few months?

Digging into the factors that drive the company's performance can answer these questions and provide insight into The Trade Desk's long-term prospects.

The Trade Desk's catalyst for revenue growth

This year's increase in The Trade Desk's share price is understandable. The company generated double-digit revenue growth despite the advertising industry's 11 months of ad spending declines before finally rising in May.

Data source: The Trade Desk. YOY = year-over-year.

Connected TV (CTV) is a key driver of The Trade Desk's revenue growth as consumers increasingly favor streaming services over traditional linear television, attracting advertisers to the medium. Industry forecasts estimate U.S. CTV ad spending will reach nearly $41 billion by 2027, almost double last year's $21 billion.

Consequently, entertainment companies, such as Paramount Global and Walt Disney, have adopted The Trade Desk's ad technology to help generate revenue from this consumer shift to CTV. These factors led to video ad spending, which includes CTV, becoming the largest portion of The Trade Desk's business in Q1.

The Trade Desk's CTV success prompted management to state, "CTV is our largest and fastest-growing channel, and will be for the foreseeable future."

Other growth factors for The Trade Desk

Another secular trend propelling The Trade Desk's revenue is the rise of retailers turning to online advertising as a source of additional income. Referred to as retail media, industry forecasts predict ad spending in this space will grow from $45 billion this year to over $106 billion by 2027.

The Trade Desk offers a retail media marketplace where retailers gain access to advertisers willing to advertise on their sites. Macy's joined The Trade Desk's retail media network in May.

The advent of retail media, adding to CTV, mobile, display, and other online ad formats, means digital advertising complexity is increasing. To help advertisers, The Trade Desk launched a new artificial intelligence (AI) technology called Kokai on June 6. This AI helps advertisers strategize ad budget spending to maximize return on investment.

The global AI market is expected to grow from about $208 billion this year to nearly $2 trillion by 2030 as businesses increasingly lean on AI to streamline work. This massive growth provides The Trade Desk with a multi-year tailwind.

The Trade Desk's additional strengths

The Trade Desk also benefits from the ad industry's transition away from third-party cookies, the main method to target consumers with digital advertising.

These third-party cookies raised privacy concerns among consumers, but 75% of advertisers still use them.  That's where The Trade Desk's cookie replacement technology, Universal ID 2.0 (UID2), comes into play.

UID2 maintains consumer privacy by encrypting their data and assigning an identifier used by advertisers for digital ad targeting. Because UID2-based targeting works well, advertisers are willing to pay more for it, helping The Trade Desk grow revenue.

At the start of the fourth quarter last year, UID2 adoption was at 15% among third parties collecting consumer data for ad targeting. After the first quarter, adoption reached 75%, and that included businesses such as Amazon and Salesforce.

The Trade Desk's UID2 success, combined with industry growth in CTV, AI, and retail media, puts the company in an excellent position to continue its track record of revenue growth over the long term. In fact, The Trade Desk expects second-quarter revenue to hit $452 million, a 20% year-over-year increase.

What's more, The Trade Desk's financials are strong. The company has been profitable since 2013 even though many tech companies are not, and it was debt-free as of Q1. 

The Trade Desk also achieved a record free cash flow of $177 million in Q1, enabling the company to implement a share repurchase program, which contributed to its share price increase.

The Trade Desk is firing on all cylinders. So even if macroeconomic conditions cause the stock price to gyrate in the short term, the company is well-positioned for years of revenue growth, making the stock a good long-term investment.